Strategy Development Tools For Analyzing Internal And External Factors In Business

Porter’s Five Forces

Discuss about the Competitive Strategy and Development Tools.

In today’s competitive business world, organisations focus on generating a competitive advantage in the industry in order to improve their effectiveness and sustain their future development. The senior-level executives use different strategy development tools in order to collect necessary information which enables them to implement strategies to improve the company’s operations and their efficiency. This essay will analyse three different strategy development tools that are used by modern companies to analyse their position in the industry and implement strategic policies. This essay will include porter’s five forces, resource-based view (RBV) and PESTEL analysis. Organisations use these frameworks for analysing different factors that influence their business and take proactive actions to avoid the issues face by the enterprise. Further, this essay will include different examples regarding companies in order to understand the role of each framework.

Michael Porter developed the five forces framework which analyses the competitive environment in a sector in which a product or company operates. The model enables management to ascertain attractiveness and unattractiveness of industry and implement policies for managing their operation and generate competitive advantage (Tavitiyaman, Qu and Zhang, 2011). The five forces affect the business of a company/product include the threat of entry, supplier power, buyer power, threat of substitutes and competitive rivalry. The ease or difficulty faced by new competitors while entering into the industry is referred to the threat of entry. In order to manufacture products or provide services, companies rely on suppliers and the ability of suppliers to pressure companies into accepting their demands is referred as supplier power. Similarly, customers’ ability to switch company’s products or change their prices is referred as buyers’ ability (D’Aveni, Dagnino and Smith, 2010). The alternative products that perform the same functions as a company’s products are referred to its substitutes, and they influence a corporation’s effectiveness. The competitive rivalry is defined as the intensity of competition faced by an organisation while operating in a sector.

This model is used by executives in a corporation while implementing business strategies or launching new products in the market. For example, Nestle operates in food processing industry and its products are available worldwide. The threat of new entrants is low because the industry is substantially large and competitive and it requires high capital investments. The threat of substitute goods is high because both local and internal companies manufacture similar products. Suppliers’ bargaining power is high because quality suppliers are limited and Nestle is dependent on them to offer high-quality raw materials. Bargaining power of buyers is high as well because there is no switching cost (Sarkar and Costa, 2008). The competitive rivalry is low because Nestle has gained a strong position in the global market and it is difficult for competitors to match its success.

Resource-based View

The Resource-based view is referred to a framework which considers resources as a crucial aspect that assists in increasing a company’s performance. The model provides that if a resource exhibits VRIO attributes, then it is able to provide and sustain competitive advantage of an enterprise (Kraaijenbrink, Spender and Groen, 2010). This model provides that instead of looking outside, companies should focus on insider resources to find a source of competitive advantage. Management of an enterprise uses this model in order to generate and maintain a competitive advantage in the firm based on internal resources. The RBV relies on both tangible and intangible resources. Tangible resources include land, building, capital, and other physical things that a corporation is able to buy from the market. Intangible assets include assets which have no physical presence by they are owned by an enterprise such as trademark, copyright, brand reputation and other intellectual property (Terziovski, 2010).

Top-level management uses this model in order to generate and sustain competitive advantage in the enterprise. The resources that generate competitive advantage shows characteristics of VRIO model which is an acronym for value, rarity, inimitability and organisation (Boyd, Bergh and Ketchen, 2010). In order to understand this model, Toyota is a good example. The corporation operates in the automobile industry, and it is one of the world’s largest automaker. The management used RBV model to identify resources and capabilities that improve company’s performance and provide it a competitive advantage. Toyota effectively uses its tangible assets to establish a ‘lean’ manufacturing process globally by using efficient supply chain and inventory management system (Monden, 2011). Similarly, intangible assets of the enterprise include positive brand reputation and effective leadership abilities which enable it to generate and sustain a competitive advantage in the industry.

A PESTEL framework, which often referred to PEST analysis, is defined as a tool which is used by companies to track the environment in which they are operating or planning to launch a new product. This model analyses different political, economic, social, technological, environmental and legal factors that are necessary to be analysed by the management while taking business decisions (Dockalikova and Klozikova, 2014). The political factors are influenced by political parties in a nation which include factors such as government policies, foreign trade policy, political stability, trade restrictions and others. The economic factors include factors such as economic growth, inflation rates, unemployment rates, exchange rates and others. The social factors include population growth rate, safety emphasis, lifestyle attitudes, cultural barriers, age distribution and others. The technological factors include the level of innovation, automation, technology incentives, technological changes and others. The environmental factors include weather, climate change, environmental policies and others (Issa, Chang and Issa, 2010). The legal factors include discrimination laws, copyright and patent laws, employment laws, health and safety laws and other legislation.

PESTEL Analysis

Business researchers and top-level management use this tool in order to create strategic policies for improving the company’s profitability by improving its operations. Apple Incorporation is a good example. The company operates in computer hardware, software and consumer electronics field. Any radical change in political environment affects the profitability of Apple, for example, political instability and changes in trade legislation brought by Trump administration have a negative impact on the company’s growth (Khan, Alam and Alam, 2015). Increase in labour costs in China and rise in the US dollar exchange rate has a negative impact on Apple’s operations. Ethical concerns regarding Apple’s manufacturing facilities in China and lack of people attachment to its products can negatively affect its sales (Garside, 2012). Competitors including Samsung and Google are introducing new consumer products that perform similar or better user experience which can negatively affect Apple sales. The company is known for offering environment-friendly products, and it invests heavily in renewable energy sources to power its operations. Lawsuits with Samsung regarding intellectual property rights and lack of fulfilment of employment laws in China are big concerns for Apple (Roberts, 2016).

In conclusion, corporations use different strategy development tools for analysing various internal and external factors that influence their business. These models assist management in collecting necessary information which utilises them while developing business strategies for addressing business issues and increasing its profitability. The Porter’s five forces model, resource-based view and PESTEL analysis are three of the most common tools which are used by companies to evaluate different internal and external factors that affect their operations. The Porter’s five forces model assesses attractiveness or unattractiveness of an industry. The RBV model assists management in determining a competitive advantage by analysing internal assets. The PESTEL framework is used for analysing external factors face by a corporation. These frameworks assist companies in increasing their profitability and sustaining their future development.

References

Boyd, B.K., Bergh, D.D. and Ketchen Jr, D.J. (2010) Reconsidering the reputation—performance relationship: A resource-based view. Journal of management, 36(3), pp.588-609.

D’Aveni, R.A., Dagnino, G.B. and Smith, K.G. (2010) The age of temporary advantage. Strategic management journal, 31(13), pp.1371-1385.

Dockalikova, I. and Klozikova, J. (2014) MCDM Methods in Practice: Determining the Significance of PESTEL Analysis Criteria. In European Conference on Management, Leadership & Governance (p. 418). Academic Conferences International Limited.

Garside, J. (2012) Apple’s factories in China are breaking employment laws, audit finds. [Online] The Guardian. Available at: https://www.theguardian.com/technology/2012/mar/30/apple-factories-china-foxconn-audit [Accessed 14 April 2018].

Issa, T., Chang, V. and Issa, T. (2010) Sustainable business strategies and PESTEL framework. GSTF International Journal on Computing, 1(1), pp.73-80.

Khan, U.A., Alam, M.N. and Alam, S. (2015) A critical analysis of internal and external environment of Apple Inc. International Journal of Economics, Commerce and Management, 3(6), pp.955-961.

Kraaijenbrink, J., Spender, J.C. and Groen, A.J. (2010) The resource-based view: a review and assessment of its critiques. Journal of management, 36(1), pp.349-372.

Monden, Y. (2011) Toyota production system: an integrated approach to just-in-time. Florida: CRC Press.

Roberts, J.J. (2016) Apple at the Supreme Court: A Guide to the Big Samsung Showdown. [Online] Fortune. Available at: https://fortune.com/2016/10/10/apple-supreme-court-samsung/ [Accessed 14 April 2018].

Sarkar, S. and Costa, A.I. (2008) Dynamics of open innovation in the food industry. Trends in Food Science & Technology, 19(11), pp.574-580.

Tavitiyaman, P., Qu, H. and Zhang, H.Q. (2011) The impact of industry force factors on resource competitive strategies and hotel performance. International Journal of Hospitality Management, 30(3), pp.648-657.

Terziovski, M. (2010) Innovation practice and its performance implications in small and medium enterprises (SMEs) in the manufacturing sector: a resource?based view. Strategic Management Journal, 31(8), pp.892-902.